“It’s surprising how much they’re spending in comparison to the downtrend of revenue,” said Jeffrey M. Silber, analyst for BMO Capital Markets. “I think that’s what really surprised investors.”

DeVry’s
DV, +0.00%
revised fourth-quarter outlook showed the Downers Grove, Ill.-based education service anticipates revenue between $500 and $510 million with operating costs and expenses between $465 and $475 million. In addition to revenue shortfalls, management faces increased operating costs, a rise in spending and enrollment declines over the next year.

“We believe DeVry’s announcement is a negative read-through for the industry as it suggests that demand remains weak and student acquisition costs could be on the rise,” Sara Gubins, research analyst for Bank of America Merrill Lynch, wrote in a report.

New student enrollments, or “starts,” are used to measure growth within the sector.

“We expect the worst of the start declines are behind us,” wrote Gubins. “However, we expect another term of undergrad start declines in the fall. Like others, starts are being hit by a tough economy, a longer selling cycle, and lower admission advisor productivity.”

In their quarter preview, DeVry said it expects summer term enrollment to decline 15% to 17% at DeVry University and decline 19% to 21% at Carrington Colleges Group, when compared with the same period last year.

But not every for-profit school is seeing enrollments slide.

Capella Education Co.
CPLA
said Tuesday in its report on second-quarter results that enrollment in the third quarter could rise for the first time in nearly two years, reversing a seven-quarter decline.

Easy access to financial aid has been a major student recruitment tool at for-profit schools. Concerned critics cite these loans as evidence of why increased regulation is necessary. They say too many students are qualifying for loans that they cannot repay, shifting more debt to the government.

In June, for-profit schools scored a victory against an Obama administration rule that would have kept the bottom 25% of schools from qualifying for federal student loan eligibility. A federal judge rejected the rule, created by the Education Department in 2010, calling it arbitrary.

A sector leader is Apollo Group Inc.’s
APOL, -1.69%
University of Phoenix. Apollo stock took a hit after DeVry’s earnings warning, briefly falling to $26.43, a 52-week low. The Phoenix-based education service is also one of the 10 worst-performing stocks in the S&P 500
SPX, +0.64%
since President Obama took office on January 19, 2009.

DeVry is also on that list.

For-profit schools have had to adjust business plans to accommodate shifts in student needs. Schedule flexibility and extensive online course offerings have helped schools flourish. For Grand Canyon Education Inc.
LOPE, +1.87%
one of the few companies in the sector seeing growth, successful local marketing provided an edge.

“They’re focusing more on local or regional schools, as opposed to the others that are going more broad,” Silber said. “It has been a good move so far, but it’s certainly been costly to do so. They’ve been adding dorms, basketball arenas things like that.”

Grand Canyon Education closed at $17.78 a share, up 11% since January and up 14% over the past 12 months.

The biggest concern remains stabilizing enrollment. With the economy still sluggish, the job market overcrowded and lawmakers concerned about awarding financial aid, a slowdown was inevitable.

According to Robert Craig, an analyst at Stifel Niclaus, DeVry “was later to enter the trough and was later in taking aggressive action to adjust to both new regulations and lower levels of enrollment.”

However, DeVry’s upside could be that because it functions both as a online and in-class education provider, it has the flexibility to cut costs where traditional public and private universities cannot.

Craig wrote in a note to analysts that DeVry stock would continue to be “a lackluster performer until evidence emerges of an [enrollment] recovery and/or cost cutting provides some tangible protection to earnings.”

In their earnings warning, DeVry announced it also plans to cut 570 positions across its institutions, mainly at DeVry University and Carrington Colleges Group in order to meet its fiscal 2013 financial goals.

But as Silber points out, the spiral down of DeVry stock is representative of a sector issue.

“They’re certainly not alone,” Silber said. “[DeVry] may be lagging behind some of the trend a bit, but they’re not the only ones suffering.”

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